Tuesday, August 30, 2011

Retirement Preparation in a Turbulent Economy

In recent years the United States economy has seen some radical fluctuations, from the downfall of major financial institutions to the more recent news of increasing our nation’s debt ceiling.  To put it gently, times have been relatively tough for the average American, especially those looking to retire in the near future. 

Many individuals are looking to financial advisors for help, hoping to find sound advice which will grant them success on their road to retirement.  But still, even with professional advice decisions can be tough to make and the fear of the unknown can bring about a sense of panic.  Whether you’re forced into early retirement due to a job loss or you’re still in the pre-retirement stage of your life, planning for retirement in today’s economy is going to require an array of hard decisions. 

Here are just a few key decisions every individual planning for retirement will at some point have to make. 

·         You’re going to have to decide if you want to keep your current 401(k) where it is, or roll it over to an IRA.  If you do decide to rollover to an IRA, you will also be faced with the decision as to how much to invest. 

·         When determining your investment options you will have to decide whether you want to take an aggressive or relatively passive position.  Remember, which ever route you do choose to take, the returns must be large to stay ahead of inflation in order to cover the increase in cost of living expenses.

·         Another major decision to be made has to do with your Social Security.  Do you take Social Security payments now or wait until you reach your full retirement age?  If you can afford to wait until you turn 70, or reach the break-even point, your benefits will be larger, but many people feel they simply can’t wait. 

·         Determining what to do with your mortgage payment also plays a major role in preparing for retirement.  Do you sacrifice some of your retirement money and pay off your mortgage or continue with a large monthly expense?  This option generally requires a fair amount of capital, which would reduce the amount of available funds for an individual, but would also get rid of one of your largest monthly expenses. 

These are just a few of the decisions each individual planning for retirement will have to evaluate at some point in time, but regardless of how difficult they may be, preparation is the key to a smooth retirement.  Retiring in today’s economy has become pretty complicated, with many rigorous calculations needed to achieve success, but don’t let that discourage you.  There are plenty of tools and credible financial professionals out there to help you make these decisions, just take your time, do plenty of research and make sure you find the best options available.  

Thursday, August 25, 2011

Part Two: No Investor Ever Folds

While many of you want to believe that you are on track for retirement - and many of you actually are, confidence is not something you are comfortable with. It wears like a wool sweater on a summer day: protects you from the sun while melting what you are protecting in the process. In other words, there is no happy medium anymore. It seems to have simply left the arena. Or has it?

Ironically, those of you who were able to answer the questions in the previous post, "Now What Retirement?" will probably not be able to do the same in the next segment of our look at "Now What?" as we grapple with investments. Yet retirement involved investing. Didn't it?

In some ways, retirement or the near proximity of it is a form of investing. You did, in all likelihood use the same place where investors flock: bonds, stocks, commodities, perhaps and in many instances, that access came via your 401(k). This is, for the average American, the extent of their investment exposure.

You might argue that your home is an investment. In the truest definition, it is not. It is neither liquid nor accurately valued at the end of each business day. The process for buying and selling is neither seamless or efficient. In fact, every dollar surrounding the buying and selling of a home seems to be a waste. So no, your home is not an investment. Unless of course, it is lumped in with your retirement plan. But the parameters have changed in that event and it becomes more asset than investment asset.

But the not-so-near retirement planners consider each move they make to be investment driven. Then drive as if it were. And in taking the proverbial investment wheel, you need to know what the rules are.

In a skittish market seemingly set off by the slightest hint that all is not so perfect (and when has it ever been?), the temptation to follow all of the bad investor habits we have discussed here over the years is multiplied tenfold. You want to sell when everyone else is selling and buy when they shift course. You worry that what was once a good decision is no longer as good, even though little has changed. Sure, the news is the news and is fluid. But the news is much of the same, recast.

So, as the siren of sell sings in your ear, remember this: Consider risk, not performance. Risk is basically a four letter word for "diversifying your assets across as many classes as possible". While you may not be able to buy individual assets in each of the major asset classes in quantities enough to make diversity work well, you can buy the indexes. In times of turmoil, parking your money in the broadest based places - and they should have been indexed in the first place, protects your money in the same way the wealthy tend to protect theirs.

The smartest investors are not the ones who are all-in. In the case of smaller investors, the emergency account you have built up is similar to the cash reserves that the wealthy might have. If you don't have to sell anything, and that temptation is there when the market begins to slide, because you have money on the sidelines, you can wait it out. And that is why those who consider themselves more savvy as investors still know the real value of a portfolio is the cash available. Even if the only opportunity is surviving until there is one!

No investors ever folds. The investors who have been in it for the long-term know that even if the market news is bad, even if the gyrations seem to be getting closer rather than farther away, even as the concerns have become more global, panic has never gotten anyone a profit. But patience has. You may sell a loss but for tax purposes. And you may sell a gain perhaps because of out-performance or rebalancing. But the wisest investors never sell based on fear.

Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer

Monday, August 22, 2011

Are You Asking: Now What?

I've been away a couple of weeks on hiatus but is seems there is nowhere in the world you can escape the marketplace concern. We have turned into a nation of economy-watchers. It's as if the voyeuristic nature of simply gazing helplessly, frozen in place or prompted by muscle memory, should force us to make investment, retirement and personal finance decisions right now even though we might just regret them at some point in the future. So I offer you a four part series on what we should do in the coming weeks as we anticipate that the previous weeks will give us more of the same.

So we begin with Now What Retirement

Believe it or not, some people, the true Boomers are actually on track for retirement. Right on the cusp of making the decision is quite possibly the wrong time to make most difficult one you will ever make. You may have second guessed your investment strategies over the last several years but had you been closer to what we consider traditional retirement age, those choices became fewer. And harder.

In fact, had these Boomers been preparing as they should have, sitting on their well-diversified portfolios and riding out the downturn in 2008 until the present, they may have actually found inaction more fruitful than shifting gears - gears that should have been set for low in the first place. And now, as the market roils for what looks to be another rise, dip and with any luck, rise again in the coming months, the nearest retirees need to make choices that are just as prudent as they are. For those of you who are not ready but at that age, the sooner you answer the following questions, the closer you too will get to the point.

What to do with your 401(k)? For this person, the choices are relatively narrow with consequences on each decision possibly impacting their income decades down the road. To leave your money in your old employer's 401(k) might be a good idea if your old employer has a good plan. They may have low cost fund options and on the other hand, have higher than needed administrative costs. If your plan had the foresight to include an annuity and you are a woman, this quasi investment (part mutual fund/part insurance plan) will give you a relatively clear look at your future income based on a unisex life expectancy. (Annuities bought outside your 401(k), will cost a woman more because of the expected longer-life span for women as compared to the same age man.)

And if I have to rollover? In most cases, you will be jettisoned form the plan which means you now have to make the choice. If you are a man, the decisions you make should always include "what if I die first" as the ultimate determination of how you take money from your retirement plan. For women, the consideration should be less about what your spouse may or may not do but what you should do should he make the wrong choice. You will need to protect your life first, and doing something that goes against your very nature: putting everyone else second.

Once again, you will consider the annuity. But you probably shouldn't commit your entire nest egg to it. You will need access to cash and keep that money invested at the same time has been the hardest job seniors have had in the low interest rate environment we have right now. A 10-year Treasury, based on inflation at its current levels, is actually considered a loss. So you will need to keep some of your money invested, perhaps across low-cost index funds.

Does Debt have an impact? It will be tempting to use this payout to get your retirement debt in order. This is generally not considered a good option unless that debt is so large that it will saddle you for the rest fo your life. On a fixed income, a debt counselor can construct a good plan and get the process moving along quicker and more efficiently. Keep in mind, you may love the house or condo you live in, but if the debt from trying to own it is too high, a debt counselor will tell you what you can't admit to yourself. If you overpaid for your home and do not expect to live long enough to recover your payment and equity, the counselor should be able to help with this as well.

Without debt, your home may be the single greatest retirement safety net you have. But don't use it until you are actually about to fall. Tapping the equity in advance of when you might have an emergency need is foolhardy in most instances. Wait as long as possible. Involve your children and your attorney (who has your will) and if you have one, a financial planner. You'll need experts.

Should I take Social Security? As to Social Security, take it when you need it. Experts are telling us to wait as long as possible. And it is sage advice. But if it is possible to take it, save it and return it at full retirement without having spent it, you can upgrade your monthly payment to the full payment due at full retirement. But you have to save it. And even if you don't, you now have the emergency medical account you might need is the interim. But if you can do it, don't calculate this income until the last possible minute. Ladder your retirement income so as to get an economic boost every several years with Social Security withdrawal being the last step.

And don't become frustrated with the argument that you could have done more. We all could have. But regret doesn't solve the issue at hand: dealing with what you have is the most important job right now.

So take your eyes of the news. Long-term issues are rarely reported on any channel. They just aren't sexy. If this reality is difficult to imagine, live the sixth months before you retire on half of your current income. Can't seem to do it? Then you need to rethink how much you will need, in part because for most retirees, even if they are beginning retired life with 75% of their current income, inflation, taxes and health care considerations will soon bring it to fifty percent. So calculate from there.

Next up: now what investments

Paul Petillo is the Managing Editor of BlueCollarDollar.com/Target2025.com

Tuesday, August 16, 2011

On Arriving at the Dream...

Too often people tell me how much they’re “dreading” their retirement, and I’ve finally had enough.   To those who act as if retirement is something that might just sneak up on them at any time, I have one word… preparation.  With the right amount of research and preparation, your retirement can be everything you’ve ever dreamed of.  From long days on the golf course to Mediterranean luxury vacations, there are plenty of ways to enjoy your later years.  But first, you’ve got to earn it.

Here are a few things to keep in mind when thinking about and researching retirement, accompanied by some great resources for doing so…
  • ·      Where to Live – While Boca and Palm Springs have etched themselves out as iconic retirement communities, there are plenty of places all over the country that aren’t half bad to settle down in.  This cost of living comparison helps determine relative pricing and food indexes of any region or city in America, and if you’re considering purchasing a new home, you can compare real estate firms by location, number of properties and more with this commercial real estate comparison.
  • ·      Investments – When it comes to investing your money, there is certainly more than one way to skin a cat.  Nonetheless, it can never hurt to have a little advice, and this directory of investment advisors helps find investment advice by location, fees, advisory activities offered and more.  For those who think that hiring an investment advisor might be overdoing it, consider keeping your finances in line with some personal finance software.  If there is one thing to be said about your finances, you can never be too organized.
  • ·      Insurance – No retirement conversation is void of the topic of life insurance.  It’s can be a dismal topic, but an all-important one.  Researching insurance providers can be a lengthy process, but this tool makes everything much simpler than you might expect.
The earlier you start on planning your retirement, the earlier you might even be able to consider retiring.  The truth is, it’s never too early to start researching the next few decades of your life.  Use these resources, mixed with a few hours of due diligence a week, and you’re sure to be on your way to a happy retirement.

Monday, August 8, 2011

On the Radio about Index Funds

I thought it would be a good idea to rebroadcast an episode of my radio show just as the stock market is tumbling. Larry Swedroe is my guest on the Financial Impact Factor Radio show and a full-time advocate of index fund investing and as every Boomer should know, they are well worth considering.


Listen to internet radio with financialimpactfactor on Blog Talk Radio
Also consider listening to Larry's take on the recent turmoil in the markets by clicking here.

Paul Petillo is the managing editor of Target2025.com/BlueCollarDollar.com and a fellow Boomer.

Comparing and Researching Retirement Plans

When it comes to choosing a retirement plan, researching your options is a must, but sometimes sifting through pages and pages of government data can be more of a hassle than its worth.  It's important to know what each plan has to offer, but it can be hard to find easy to understand info explaining each of your options.  What’s the difference between a 401(k) and a 457(b)?  What plan has the highest maximum employee contribution?  (What does maximum employee contribution even mean?)  While finding the answer to these kinds of questions is usually a daunting, complex process, there is a new retirement plan comparison that provides a comprehensive, easy to use way to research and compare the different retirement plans. 

The comparison, provided by FindTheData, allows you to search and compare your options by max. employee contributions, employer contributions, age 50+ catch-up contributions, and much more, simplifying the process of learning about what your options are when it comes to choosing which retirement plan is best for you

Moreover, the retirement plan guide provided with the comparison tool helps to not only understand what each plan does or does not provide, but also what everything means, which at times can be the most important piece of information you need.  FindTheData’s guide will help understand what it means if a plan includes an IRA, a profit-sharing plan, a defined benefit plan, and more. 

Next time you’re researching the different retirement options, don’t get stressed out about the seemingly endless amount of data out there.  Check out this easy to use resource to get straight to the cold hard facts on each plan.  Once you’ve narrowed your options down, you can even compare your top choices in a side-by-side format that helps really get down to the details of what each plan has to offer. 

Choosing a retirement plan is a huge decision, but it doesn’t have to be as difficult as it may seem.  Take your time when choosing a plan, as you’ll most likely be sticking with it for quite some time.  Research your options, consider the benefits of each, and go and decide which plan is best for you!

Monday, August 1, 2011

On the Eve of the Vote: Five Things

As we have watched the slow slog towards August 2nd and the expiration of the debt ceiling, there are a few things we should consider in advance of that date and a couple of additional thoughts in the days immediately following. Like most things, the debt ceiling expiration date is mostly arbitrary, much like the turning of a new year or the end of a quarter. In other words, 08.02.11 means little to the average person and in the days following, should not be of much concern. Here's why.

Borrowing: We have been in one of the most favorable borrowing environments since records began being kept. If you qualify for a loan, be it a home mortgage or other big ticket purchase, the date will not change your ability to borrow. It may cost you more but prudent borrowers should have already considered this eventuality prior to beginning their purchase. Interest rates may and probably should go up if an agreement isn't reached. The phrase "lock-it-in" will be considered sage advice as it should be. On the flip side, there is little likelihood the seller of whatever big ticket item you are purchasing may just offer additional financial incentives to offset any increased borrowing cost.

Selling: An increase in interest rates would not benefit those who believe their homes are worth a certain amount. It would stymy the housing market, slow the sale of automobiles and create a situation that most retailers have been dealing with already: more saving than spending. While less spending will not get the economy moving and certainly won't create more jobs, despite the argument in Congress that less spending has the opposite effect. We'll just be stuck in neutral for longer than we had hoped. But not as long as many suggest we will.

Markets, Bonds: If you are a conservative investor with money in bonds, you are much smarter than the media gives you credit. Savvy bond investors ladder their holdings for just such an event and will probably fair well. Yes, the foreign investor might become a little more cautious and the next Treasury auction will be weaker than most hope it will be. But over the long-term, the real reason folks hold bonds, the effect will be offset as time moves on. Yet, if you are in bond mutual funds, you should have little to worry about as long as your holdings aren't too much of your portfolio. If you're older, cash might be a better place in the interim.

Markets, Stocks: More than one person has suggested getting into much safer investments before the 08.02.11 deadline. Cash is okay but if history tells us anything, this might be amongst the worst long-term decisions you could make. Most companies could borrow if they needed to no matter what happens. But why bother. Most of the corporate debt has been refinanced to historically low levels. And most companies in the S&P 500, an index of the largest companies in the country, are flush with cash reserves. That has been the most worrisome part of the recovery: businesses could have hired, they could have afforded to hire but they didn't. Selling stocks even if they dip somewhat should provide an opportunity to buy shares that are worth more for less. If you are buying steadily, this should prove an advantage for those with time.

You: Turn off the television or change the channel. None of what you are hearing, none of the talking heads everyone is trotting out means anything. The politicians involved in the debate are saying little or nothing and in many respects, act like this is the first time such an event has ever happened. Personally, the President should simply invoke his right in the 14th amendment and raise it without Congress. Yes, it will cause an uproar and yes, it would be the right thing to do. But creating tension among the American people is not a solution to solving some of the nation's biggest concerns.

In the three years since the Great Recession began, you should have put all of your plan in place: reduced your personal debt, created a modicum of savings and in the process, increased your contributions to your retirement plans. If you haven't, this will probably send the message again that your wealth is not what Washington thinks it is. You should be much more pliable and hopefully, just a tad smarter - or jaded.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com and a fellow Boomer.